Corporate Law Update

This week we look at whether an indirect majority shareholder of a company was entitled to see its financial records under a shareholders’ agreement, as well as the first steps towards a new code of corporate governance for private companies.

Government appoints chair to produce new private company code

The UK Government hasannouncedthat it has appointed James Wates CBE (chairman of the Wates Group and adviser at Infrastructure Exports: UK) to chair a new industry group to develop a set of “guiding principles” for large private companies.

The move comes after the Government’s recent green paper on corporate governance generally and its response (seeherefor more information), in which it committed to formulating a code of corporate governance for large private companies in order to improve standards of corporate governance.

Mr Wates will work with various institutional bodies, including the Financial Reporting Council (FRC), Institute of Directors (IoD), Confederation of British Industry (CBI), Institute for Family Business, British Private Equity and Venture Capital Association (BVCA), Investment Association, Institute of Business Ethics and Trades Union Congress (TUC), and ICSA: The Governance Institute.

The group’s first meeting took place on 29 January 2018.

The announcement also confirms the Government’s intention to produce new legislation requiring all large companies to show their responsible business arrangements. The announcement states that those new rules will apply to companies with either:

2,000 or more employees; or

both turnover above £200 million and a balance-sheet total above £2 billion.

Shareholder was entitled to copies of company’s financial records

The Court of Appeal has found that the shareholder of a company was entitled to copies of documents relating to the financial performance of the company’s subsidiary under the terms of a shareholders’ agreement.

The GGV Group consisted of a holding company and two subsidiaries. Mr Herd held 25% of the shares in the holding company, and a private company owned by Mr Wollenberg held the remaining 75%.

Mr Wollenberg’s company and Mr Herd entered into a shareholders’ agreement with the GGV Group. In that agreement, the holding company of the group promised to:

provide Mr Wollenberg’s company and Mr Herd with “such information relating to [GGV Group] as [they] may reasonably request from time to time”; and

keep them “fully and promptly informed of all material developments regarding [GGV Group’s] financial and business affairs and all significant events . . . which may affect the Group”.

GGV Group took on financing from a third party lender, which was secured by charges over the shares in the two subsidiaries.

In time, the group began to miss its repayments. The lender raised the prospect of appointing receivers unless the two directors transferred their shares in the group to it. Mr Wollenberg declined to do so and, ultimately, the lender appointed receivers.

The receivers began exploring the possibility of selling the shares in the subsidiaries to a third party, failing which the lender would acquire those shares for a nominal sum.

The request

Mr Wollenberg became concerned about the sale process. He requested certain financial information about the GGV Group, both through his company under the terms of the shareholders’ agreement and in his capacity as a director of the group’s holding company.

Mr Herd argued that Mr Wollenberg was not seeking the information in order to monitor the sale process, but rather to challenge it and eventually litigate against the receivers. He said that this was an “improper purpose”. Under English law, a director does not have a right to inspect a company’s books and records if he is seeking only to benefit himself and not to benefit the company.

What did the court say?

The Court of Appeal took a different view. In the end, it decided that Mr Wollenberg had not requested the documents for an improper purpose.

It said that Mr Wollenberg’s desire to oversee the sale process was relevant to preserving the GGV Group’s only significant asset. This was particularly pertinent given that, in the end, the sale process failed and the subsidiaries were sold to the lender for a nominal price.

However, more interestingly, the court said that Mr Wollenberg’s request under the shareholders’ agreement was not subject to a proper purpose or reasonableness test. In particular, it said that the obligation to keep the group’s shareholders informed of material developments had to be observed “irrespective of whether [the] request would or would not be reasonable”.

In other words, the court refused to take the more restrictive test that applies when a director is seeking copies of books and records and apply that test to the shareholders’ agreement.

Practical implications

It is difficult to generalise from cases like this one. The outcome will depend on the particular facts and the wording of the shareholders’ agreement. However, there are a few points worth noting:

If making a request, it is important tostate clearly the reasons for seeking the books and recordsin question. A request by a director designed to scrutinise the sale of a company’s assets, particularly in a potential insolvency scenario, would appear be a proper request.

If the director is also a shareholder (or controls a corporate shareholder), it may be possible to avoid the test entirely by making the request under a shareholders’ agreement. This will work only if the agreement gives the shareholder a right to the information and that right is not qualified.

If the members of a company want to prevent access to the company’s books and records in certain circumstances, they shouldbuild restrictions into the shareholders’ agreement. For example, the agreement might allow the company to refuse a request if the directors believe the shareholder is seeking information to sue the company or its directors or hinder its activities.